How do professionals value used machinery & equipment?

Blog >

How do professionals value used machinery & equipment?

Whether you’re looking to sell your equipment, buy pre-owned machinery, determine insurance coverage or comply with financial reporting requirements, understanding how to value plant, machinery and equipment is essential. Plant, Machinery & Equipment valuation is critical for a business’s financial health, ensuring accurate asset management, compliance with financial and legal requirements and making informed business decisions.

Understanding the Basics of Machinery and Equipment Valuation

What is Plant, Machinery and Equipment Valuation?

Plant, Machinery and Equipment (PME) valuation is a specialised field in appraisal and financial analysis that focuses on determining the market value or worth of industrial equipment, machinery and entire manufacturing plants. This valuation is crucial for various purposes in the business and financial sectors.

Importance of Valuation of Plant, Machinery and Equipment Valuations

Accurate valuation is vital for various reasons:

Sale or Purchase: Determining a fair price for buying or selling machinery or entire plants.
Financial Reporting: For accurate accounting and reporting on balance sheets.
Insurance: To ascertain the correct insurance coverage value for equipment.
Taxation: For calculating depreciation, tax deductions or addressing other tax-related issues.
Mergers and Acquisitions: Assessing the value of assets during corporate mergers or acquisitions.
Legal Disputes: In cases of litigation, such as divorce settlements, disputes among business partners or compensation claims in the event of damage.

Factors Influencing the Value of Plant, Machinery and Equipment

Factors Considered in PME Valuation:

Age and Condition of the Equipment: Newer and well-maintained equipment typically has a higher value.
Market Demand and Supply: The current market demand for specific types of machinery.
Technological Obsolescence: How current or outdated the technology is.
Brand and Manufacturer: Some brands may have higher value due to their reputation for quality and reliability.
Replacement Cost: The cost of buying new equipment with similar features and capabilities.
Operational Efficiency: The productivity and efficiency of the equipment in operation.
Residual Value: The estimated salvage or residual value at the end of the asset’s useful life.

3 Primary Methods of Valuation

1. Cost Approach

The cost approach estimates the value of equipment based on its replacement cost and depreciation. It considers the cost of purchasing a new, equivalent piece of equipment and then factors in depreciation to account for wear and tear over time.

2. Market Approach

The market approach involves comparing the equipment to similar machinery that has recently been sold in the market. This method relies on the principle of supply and demand and is especially useful when there’s a robust market for the equipment.

3. Income Approach

The income approach is relevant for income-generating equipment. It estimates the current value based on the equipment’s projected future earnings, considering factors like expected income, operating expenses and the time value of money.

How Professional Valuers Do It

Steps Involved in a Professional Valuation

Inspection: The appraiser inspects the equipment, documenting its condition, age and unique features.
Data Collection: Maintenance records, market trends and comparable sales data are collected.
Valuation Method Selection: The valuer selects the most appropriate valuation method(s) based on the equipment type and purpose.
Analysis: The valuer applies the chosen method(s) to calculate the equipment’s value.
Report Preparation: A comprehensive valuation report detailing the methodology, findings and supporting documentation is prepared.

When to Engage a Professional Valuer

Buying or Selling Assets: To determine a fair market price during the purchase or sale of a business.
Financial Reporting: For accurate asset valuation in financial statements and financial reporting compliance.
Insurance: To determine the appropriate coverage for property and assets.
Legal Disputes: In cases of divorce, business partnership dissolutions or litigation where asset valuation is necessary.
Merger and Acquisition Activity: For due diligence, to assess the value of assets of the company being acquired or merged.
Estate and Succession Planning: For equitable distribution of assets in estate planning and wills.
Business Restructuring: To understand the value of assets during restructuring, divestiture or liquidation of parts of a business.
Investment Analysis: For investors needing a thorough understanding of the value of potential investment opportunities.
Lease Negotiations: To determine fair rental rates and terms.

Why Engage a Professional Valuer

Expertise and Knowledge: Professional valuers have specialised training and knowledge in asset valuation.
Objectivity: An independent valuer provides an unbiased assessment, which is crucial for fair and transparent transactions and reporting.
Regulatory Compliance: Ensures valuations meet legal and regulatory standards, particularly in financial reporting and taxation.
Accuracy: Professional valuers use standardised methods and comprehensive data, leading to more accurate valuations.
Market Insight: Valuers have insights into current market trends affecting the value of assets.
Risk Mitigation: Accurate valuations help in making informed decisions, thereby reducing investment and financial risks.
Dispute Avoidance: An independent valuation can prevent disputes in transactions, estate settlements and legal matters by providing a reliable figure that parties can trust.
Access to Sophisticated Tools: Professional valuers have access to databases and tools for appraisal that may not be available to the general public.
Time Savings: Conducting a valuation can be time-consuming and complex; professionals streamline the process efficiently.
Support in Negotiations: A professional valuation can serve as a powerful tool during negotiations, providing credible and authoritative data.

Certifications and Qualifications to Look for in a Machinery and Equipment Valuer

When seeking a professional service, consider the following qualifications:

Certification: Look for valuers certified by reputable organisations like the Australian Property Institute, Australian Valuers Institute (AVI), American Society of Appraisers (ASA) or the Royal Institution Of Chartered Surveyors (RICS)
Experience: Choose appraisers with experience in valuing similar equipment or within your industry.
References: Ask for references and check reviews or recommendations from previous clients.

Common Mistakes to Avoid

1. Overestimating the Value Due to Emotional Attachment

Sellers may have emotional ties to their equipment, leading them to overestimate its worth. It’s essential to base valuation on objective factors rather than sentimental attachment.

2. Ignoring Market Trends and Technological Advancements

Failing to account for market trends and technological advancements can result in an inaccurate valuation. Buyers and sellers should stay informed about industry developments.

3. Underestimating the Impact of Poor Maintenance

Neglecting maintenance and failing to keep detailed records can lead to undervaluation. Regular maintenance and proper documentation are critical for maintaining equipment value.

Conclusion

In summary, engaging a professional valuer is essential in scenarios requiring precise and unbiased valuation of assets. Given the complexity and the need for technical knowledge, PME valuation is typically conducted by professional appraisers or valuation experts with experience in this specific area. Their expertise not only aids in compliance and decision-making but also adds credibility and assurance in various financial, legal and business contexts.

Additionally, professional appraisers can provide expert guidance in complex scenarios and avoiding common valuation mistakes is crucial for achieving fair and profitable transactions. Approach machinery and equipment valuation with diligence and seek professional assistance to make the most of your equipment-related endeavours when necessary.

To ensure you’re getting highly regarded valuation services for your used machinery and equipment, consult Australian Valuations. They are 100% independent and wholly Australian-owned, so you can be sure you’re getting the right value for your investment.